SOCPA Shares Its View on Guarantees Issued on Obligations of Other Entities

The IFRS Interpretations Committee has published a tentative agenda decision regarding how entities should account for guarantees issued on obligations of other entities, seeking public comment on the matter.

In its response, SOCPA highlighted that the lack of clear guidance stems from undefined terms - specifically what constitutes a "guarantee" and a "debt instrument." This ambiguity creates significant room for interpretation when applying various standards based on how entities understand the nature of the guarantee in question. Entities might opt to apply IFRS 9 if they interpret the guarantee as a financial guarantee contract, or IFRS 17 if they view it essentially as an insurance contract (even when the entity isn't in the insurance business). They might also apply IFRS 15 in cases where the counterparty is a customer and they determine other standards don't apply, or IAS 37 when they consider the guarantee results in a provision or contingent liability. This broad interpretative scope could lead to significant inconsistencies in application, potentially undermining the comparability of financial statements.

In light of these concerns, SOCPA has recommended that the Committee initiate a project to develop clear guidelines helping preparers of financial statements distinguish between various types of guarantees. This would reduce reliance on subjective interpretation and minimize application disparities. SOCPA also suggested reviewing how standards address the option to treat financial guarantees either as financial instruments or insurance contracts.

The full comment letter can be accessed by clicking .here